Volume, Order Flow Indicators and Money Management

6.1What Volume Tells You

Volume is the quantity traded over a period. Because every trade has a buyer and a seller for the same quantity, volume itself does not tell you whether buyers or sellers outnumbered the other. What it shows is how many participants were involved at those prices — the intensity of the move.

The usual reading is that an advance on rising volume means more money is joining the move, while an advance on falling volume means fewer buyers are following it. Dow theory's tenet that volume must confirm the trend (Chapter 2) rests on this view.

Volume levels differ greatly between instruments, so judge volume against the instrument's own average (for example over the past 20 or 50 days) rather than in absolute terms. Earnings releases, index rebalancing and quarterly expirations tend to swell volume, so separate those days from genuine shifts in supply and demand.

• Volume shows the intensity of trading, not directly whether buyers or sellers dominated
• Rising price with rising volume suggests more participation; rising price with falling volume suggests fading momentum
• Judge volume against the instrument's own average